Friday, 13 April 2012

Indigo as a Monopoly

Indigo
as a Monopoly

Andrew
Dent and Alex Curry

History

In the 1990s the hard copy book market in Canada changed
dramatically. Governments had not allowed large American book stores like
Borders to expand into the Canadian market in order to protect smaller stores;
This lead to the market being full of small, mostly independent book stores. However
two new chain stores named Chapters (1994) and Indigo (1996) opened and shifted
the market share enormously. Within the
space of only a few years the two retail stores became giants in the market and
were the only contenders for market dominance. The previous abundance of small
local book stores was pushed out of business by low prices and the massive
selection that these massive stores could offer. In 2001 the two book stores merged creating
the largest book retailer in Canada by far. Over the next few years the newly
created Indigo(now including Chapters) bought Coles and Worlds Biggest Books
giving it almost complete market share in Canada through its 88 super stores
and 179 mall based stores. Indigo
continued its run of success with ever increasing revenues and net income gains
resulting in 1 billion dollars total revenue in 2008. This prompted John Lornic
to write that "no other sizable developed country has let ownership of
bookselling become so concentrated." He even stated that Indigo was,
"The closest thing to an unregulated monopoly in Canada's private
sector." However the entrance of
Amazon into the Canadian market in 2006 (which was strongly opposed on the
legal ground that American owned book retailers could not operate in Canada) lead
to Indigo losing some of its Monopoly power. This power was further reduced in
2009 when the kindle, Ipad, and other Ebook fridly hardware companies came out with
reading tablets leading to the digitalization of books on a massive scale. No
longer was Indigo the sole supplier of books in Canada, thanks to the
completive prices offered by digital books and Amazon, Indigos monopoly power
was smashed.

Characteristics

In this segment Indigo will be examined in order to determine if
indigo met the criteria of being a monopolistic firm during the height of its
in 2006.

1. The only seller
of a good or service

·Indigo was the only major retailer
with more than 4 locations in all of Canada

·The only competition was
individual book stores or very small chains such as tattle tales

·Large American book stores could
not enter

Verdict: Not the only
seller of books but took up the majority of sales: impure monopoly

2. No viable substitutes
exist

·Were a very small number of small
chains

·Were a small number of small single
book stores

·This was before online book
sellers like Amazon existed in Canada

Verdict: A few viable
substitutes: impure monopoly

3. Monopolists are Price
Makers

·Indigo relies on low prices to
prevent firms from entering the industry therefore they have little control on
prices over a certain amount

·They did not worry about losing
customers to small individual stores that could not advertise small prices or
set prices due to their high cost of production or buying the books

Verdict: had non monopolistic
ability to change price

4. Significant/Total
Barriers to Entry Exist

·Indigo had created a tough
environment to enter due to its brand recognition and dominance over prices

Finial Verdict: Indigo is the type of Monopoly that is
a firms responsible for the majority of sales in a market

Control of
Essential Resources

·The resources needed to make the books that
indigo sells are not under indigo’s control

·All these materials such as paper, printers
and the ability to purchase the rights to books from publishers are available
to most small book stores

·Also there is an unlimited amount of areas where
book stores are able to be created

Legal
Barriers

·There are no legal barriers preventing a book
store from entering the market in Canada

·There are also no financial restrictions
placed on entering the book retail industry by the government

·One major legal barrier that has allowed
Indigo to thrive was the law preventing American owned book retail companies
from entering the Canadian market

·It was this law that originally prevented the
large book stores like Borders from entering the Canadian market creating a
demand for more books

·This demand lead to the original success of
Canada’s first major book retailers Indigo and Chapters

·This Law still prevents American owned book
sellers from breaking Canada’s monopoly

Pricing
Strategy

·Indigo prices its books significantly lower
than any potential competitor in the material book industry would be able to

·This was how Indigo was able to drive previous
competitors out of the market

·An example of another firm who was pushed out
of the industry by this competitive pricing strategy was Litchman’s which filed
for bankruptcy due to its inability to produce enough revenue while staying
competitive with Indigo’s pricing

·This was the largest independent bookstore in
Canada and it failed to continue running, with this in mind it is clear that no
other bookstores could compete with the corporate monster which is Indigo

·Indigo is able to place these low prices because
of their size

·With huge amounts of retail locations across
the country, Indigo has the ability to profit greatly off of smaller profit per
unit amounts

·Unlike other monopolistic firms, Indigo is
unable to use their monopoly to increase the price of books due to the
necessity for competitive pricing which keeps other firms out of the industry

·This makes them less profitable than they
would be if there were distinct entry barriers into the industry and Indigo was
the only viable option

·The firms average total cost is not a huge
amount lower than other firms, but does instill a competitive advantage for
Indigo

The loss
of Indigo’s monopoly

·Due to the up and coming Ebook technology,
indigo’s monopoly over the book market has been almost fully taken away

·Currently, a person is able to buy an Ebook
for a significantly lower price than buying the hard copy of a book

·This is understandable due to the lack of
costs associated with producing an Ebook (simply licensing and software design)

·The situation that indigo currently faces with
the Ebook is very similar to the that independent firms previously faced with
indigo

·Because indigo would no longer be profitable
selling their books at the low price which is offered for an Ebook, they are
unable to price competitively and thus will lose a large chunk of consumers who
are looking for a ‘better buy’

·From a monopolistic point of view, Indigo
could arguably still be a monopoly in the HARD COPY book market

·Looking to the future, this market is not very
profitable with increasing technology and access to Ebooks

·The graph below displays the sales compared to
the change in profit

·As you can see, the sales of Indigo increased
as the lowered prices attracted a larger quantity demanded, but the actual
profit decreases due to the smaller profit per unit

Conclusion

In conclusion Indigo has enjoyed a successful decade as near
perfect monopoly with control over the Canadian market for books through its
ability to buy books in bulk, set prices and compete in a market were American
firms cannot enter. However in recent years this monopoly has ceased to exist
due to the introduction of Amazon in to the market as well as the mass
digitalization of book which have made hard copy books near obsolete, much like
how albums became obsolete when music went digital. In the future Indigo will have to continue
attempting to branch into different markets like the toys and games market as
well as the gift market because their main product books is losing value fast.

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